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We are a design & strategy firm. We create impact through design.Mon, 25 May 2015 22:09:53 +0000en-UShourly1http://wordpress.org/?v=4.2.35 Traps to Avoid When Growing Your Businesshttp://stevendiebold.com/5-traps-to-avoid-when-growing-your-business/
http://stevendiebold.com/5-traps-to-avoid-when-growing-your-business/#commentsThu, 01 May 2014 16:10:44 +0000http://stevendiebold.com/?p=1988In between “lean-and-nimble” and “huge and powerful?” You’re at the most perilous time for a company. I learned firsthand.

There’s a natural danger zone that occurs in the growth of most businesses. When starting out, you are extremely nimble, with low overhead and little complexity.

Once you become larger and more successful, you have plentiful resources, an established brand, and deep bench strength.

Now, those phases each have their challenges, but it’s the in-between phases that are the most dangerous.

It is a time where you lack the resources of a large company and the simplicity of a small one. Most companies that survive start-up mode go on to die a tragic death during this perilous transitional growth phase.

I’ve seen this first hand. As I grew my own start-up, I ended one year with 88 employees and 265 the next. Managing through hyper-growth makes cage-fighting look like child’s play. Personally, I made just about every mistake possible, yet somehow managed to see the company through this difficult period, emerging stronger, larger, and more profitable.

Here are the top five traps that caused me great pain along my journey, and that you can easily avoid:

1. The Overcorrect

Inevitably, growing a business involves solving a series of problems. You’ll have your share of moments where you proclaim “Doh!” (think Homer Simpson) at how stupid you were for doing something a certain way. The natural instinct is to sprint in the exact opposite direction. If you had zero client sign offs, now you’ll want 78 of them. If you lost a team member because you provided no ongoing training, you decide to offer three-day-a-week development sessions. By overcorrecting, you run the risk of creating a new problem while solving the old one. Resist this temptation, even if the original problem fills you with distain. Life–and business–is all about striking balance, and the land of unintended consequences is no way to get there.

2. The Money Trap

Now that your company has real customers and real revenue, it’s easy to just throw money at every problem. R&D slow? Add more bodies. Sales are light? Buy more ads. The challenge here is that you might not be solving the fundamental issue, which will only become exacerbated with time. As businesses grow, they become more challenging and more challenged with every step of the journey. This requires you to throw creativity and insight at issues as opposed to kicking the can down the road by throwing cash at every roadblock. If the underlying issue isn’t solved, it will come back to bite you later on with significantly more sting.

3. Putting Religion Ahead of Science

When you were a start-up, all you had was your vision and belief (aka “religion”). Your burning desire fueled you and the company to break through start-up gravity and get your business off the ground. As you grow, however, religion alone won’t be enough to sustain your trajectory. My business partner, Dan Gilbert, often says, “What got you here won’t get you there.” In most companies’ evolution, there comes a point where systems have to be documented, training materials established, and processes architected (aka “science”). Without this foundation, a company fueled only by passion derails, since your 126th employee won’t possess the same fire as team member No. 6.

4. Complicating the Process

My company started out with a lean, simple workflow. Then we screwed something up, and added an extra step to ensure that never happened again. With each subsequent issue, we added another step to the process. How much could one little extra step impact the process, right? Unfortunately, adding 10 minutes here or an extra person there added up. We eventually realized we’d built a clunky, bureaucratic, slow-moving, unresponsive mess. As a growth leader, you should be vigilant about eradicating complexity wherever possible. This applies to your products, processes, and communications.

In the words of legendary jazz musician Charles Mingus, “Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity.”

5. Gorging Opportunities

As your business grows, you will be seduced by a growing number of new opportunities. You could add to your product line, expand internationally, or film a documentary. There will be no shortage of shiny opportunities luring you away from your focus. Flip-flopping leaders who embrace the flavor-of-the-week strategy rarely build sustainable companies.

Remember this: More companies die of indigestion than starvation. When you look back five years from now, your success will based much more on the times you said “no” rather than the times you said “yes.” As the old Chinese proverb states wisely, “Chase two rabbits and both will escape.”

As a leader, seeing your company through the treacherous waters of this transitional growth phase is overwhelming. Stay focused on the rewards awaiting you on the other side of the chasm, and fight to reach dry land as quickly as possible. If you can navigate through this challenging stage, you’ll end up in the rarified territory reserved only for the champions.

Most B2B purchases begin with an economic impact study by someone inside your prospect’s organization. An economic impact study may consist of many calculations that begin and end with one simple question, “What is the economic impact of this purchase, on our financial statements?” Each major purchase that takes place in corporate America will go through a certain amount of scrutiny. A finance person will look at the cost in terms of cash flow, Internal Rate of Return (IRR), possibly Return on Investment (ROI), or even Net Present Value (NPV). These terms should not be foreign to you if your read the first chapter of, The Key to the C-Suite. Each metric reveals a story to the financial person as to the economic impact a major purchase will have on their financial statements.The Problem

As a sale’s professional the first of your problems at the start of a sale is that the economic impact analysis is going on without your input. In other words, the finance people are guessing your value as they figure out their cost, return, and impact. To determine the estimated ROI, NPV, IRR or any other financial metric they need to input the impact or estimated return your product provides. Obviously this is early in the sales process and there are no returns yet. So, finance just, “plugs” an estimated return number in there analysis model hoping for the best results. In addition to hope, they have now established what could be considered a target return for all vendors they invite in for review. The problem of course is the process is done in a vacuum with little or no input from the very vendors they want to review. Or, the process could be driven by you or a competitor laying a trap for all other vendors. In either case the process of estimating value prior to talking with vendors is going on in the background.

The Bigger Problem

Hard to imagine you have a bigger problem, but you do. Have you ever been in a sales situation and thought the deal was in the bag? Or, have you taken a prospect for their word and spent a commission before the deal was closed? Who hasn’t, right? We are sales professionals and we are optimistic. We see the world in color while everyone else sees it in black and white. Here is the scenario for you to consider.

Your competition sends an estimated ROI Business Case (Value Hypothesis) to a prospect before they come on the market and solicit other vendors to do business with. Their business case lays out the issues, pains and goals they will help resolve, it includes an estimated cost and return. In addition they may include things like expected IRR, ROI, NPV and more. Each metric they include for a CFO puts additional pressure on you to respond. What has happened here is they basically laid a trap for all other vendors (including you) by participating in the economic impact study up front. (Before it was an economic impact study.)

In addition, we are seeing corporations hire ex-bankers to help them with dealing with the financing issues many of their prospects are facing. These bankers are able to look at a value assessment model and provide insight into what we will call financeable value. In other words they are looking at a value proposition and stripping out the value that a financial institution would not provide funds to purchase. This unique insight has added additional pressure on vendors to not only provide a value proposition, but a value proposition that also includes a Business Case complete with detailed tangible, intangible, CAPeX and OPeX savings. The ex-banker is looking for value beyond the norm. For example, if you sold commercial furnaces to hospitals for a living, your basic value proposition is the energy savings you can provide. The extended value could be the reduction in time it takes an operating room to adjust their environment. By adjusting the environment quickly you allow more operations to take place, hence adding additional revenue to the value proposition. This is the type of information the ex-banker is looking for. While the competition is selling energy cost improvements, you are selling that and more.

Your challenge will be having the tools to first collect the data, present the findings and provide a complete economic value proposition picture. In addition, the ability and know-how to create a preemptive strike with a Value Hypothesis. A dashboard type document that lays out issues resolved, current and potential on-going costs, estimated values delivered, and economic impact on any number of metrics including, ROA, RONA, ROE, Earnings, Net and Gross profit, Cash flow, and more.

The Solution

It is not uncommon for sales and marketing to be at odds. In fact they are likely to be more at odds than we would like to believe. However, in the end both groups have the same goal in mind, sell more products and services. In the big scheme of things we look to marketing to establish our branding, corporate messaging and generate leads. We look to sales to generate revenue and keep our customers coming back for more. The place in the sales process where these two groups overlap is critical. Specifically, sales and marketing overlap performing demand generation. If marketing produces poor leads, sales of course will not generate revenue. If sales takes a good lead and blows it, everyone is out of work because there is no revenue.

Let me break this down in steps. At the beginning of a sale many of your ‘suspects” don’t even realize they have an issue. It is your (and marketing’s) job to create a demand or find hidden issues, pains or goals. This critical step in the process really lays the groundwork for moving a sale forward.

By educating your marketing team and building a tool that can be used at this point in the sale you are able to establish credibility, be the first to provide information your prospect will use to compare others and firmly put you in the driver’s seat. If the tool is built correctly, and marketing understands their role is to set up the tool as a Value Hypothesis, then this technique will work well. If however, it is not set up properly and you simply “dump” an excel spreadsheet on a CFO, then you are sunk.

Step 1
The first step in building a high quality Value Hypothesis is to completely understand your value proposition and its economic impact on your prospects financials. Begin with building a value inventory.

Step 2
Identify between five and ten issues that you resolve and display them on a page with a brief description beneath. This is your introduction page. When your prospect sees this page they will be able to identify some of the issues they are facing. It also lays the groundwork for discovery.

Step 3
On the next page build a chart displaying each of the value propositions with an estimated (on average) economic impact. For example, in our earlier example we discussed the impact of a new furnace on both utility bills and potential revenue improvements from a quicker turnaround in the OR environment. Each of these would be line items, and they would display an average impact based on historical success. Be sure to preface the section with a paragraph explaining the numbers are or percentages are just estimates based on size of company, typical returns, etc. Note, all you are trying to do is establish some baselines to have a discussion and move the sale forward. For example:

Also on this page include graphs or charts depicting the data you are displaying. A picture is worth a thousand words. Don’t miss this opportunity.

If you did your research on this company beforehand and used a tool like Sageworks (www.sageworks.com) you will have the industry average for up to 25 metrics. You discuss best practices and how you can bring them in alignment. You can compare their numbers to the norm in categories like, net profit, gross profit, DSO’s, Debt to Equity, ROA, ROE and more. By setting up a scenario that makes you the expert in best practice, you will be looked upon more of an adviser than as a sales professional. Bottom line, do your homework and use the tools in the market to gather the data you need to make yourself look different.

Step 4
I recommend you take a look at your economic impact potential on their Balance Sheet and Income Statement. Build a hypothesis on revenue impacts, expense impacts and solution cost. These three components will net a, “Cumulative increase” displaying your economic impact on their financial statements. For example:

Step 5
**** Lastly we like to look at one other chart. We call it the Life Cycle Summary. This chart consists of several lines. First, the Debt Service. This is the cost of a solution over the course of the life of the solution. If for example they were purchasing a furnace, it has a useful life of 20 years. However, the debt service (when it will be paid off) could be in 10 years or less. So once the payments are made the value continues over the useful life of the furnace. Include on this graph your value proposition from earlier extrapolated out over the life of the deliverable.
For example:

Note the orange line is the debt service and it ends after 12 years. The value however continues to the 20 year mark.
A Value Hypothesis is more than just a preemptive strike on a sale. It will provide your prospect with:
• A list of issues they may or may not know they have
• A baseline for value they should expect to receive
• An idea as to the short term and long term investment
• Possible economic impacts they had not figured out yet
• Information they can use to evaluate other vendors
Develop a Value Hypothesis template and perform research on each prospect you wish to use the concept. Your research can be looking at their annual report, financial statements or simply a Google search that nets you an article where an executive might be talking about expanding their operations.
Finally, the information and format from the Value Hypothesis can be used later in your Business Case. Except on the Business Case, use confirmed information.

]]>http://stevendiebold.com/creating-a-value-hypothesis/feed/0My Favorite Entrepreneur Story in a Long Timehttp://stevendiebold.com/my-favorite-entrepreneur-story-in-a-long-time/
http://stevendiebold.com/my-favorite-entrepreneur-story-in-a-long-time/#commentsMon, 22 Apr 2013 02:53:36 +0000http://stevendiebold.com/?p=2112This article originally appeared on TechCrunch.

If you don’t like it hot, use less,” he said. “We don’t make mayonnaise here.”

This morning I was reading my social media and came across an article that Christine Tsai had posted on Facebook.

It was about the founder of Sriracha sauce, David Tran, displaced from Vietnam when the North’s communists took power.

As the son of an immigrant myself, I am a sucker for an immigrant story. Moving to the US with nothing but hard work and ambition. Having a strong sense of values. And wanting to build for the next generation.

It is of course why immigrants power so many successful businesses in the US and why we need to embrace them. They have nothing to lose. They bring new ideas, new cultures, new business practices. But they mostly want to be – AMERICAN. That’s all my dad ever wanted for us. Even while he clung to his native traditions and culture himself.

If you ever want to read the great American generational immigrant business story readAmerican Pastoral by Philip Roth, which won the Pulitzer Prize and was voted by Time Magazine as one of the best 100 books of all time.

It also chronicles the forces behind the decline of the American city (which has been revived in the past 10-15 years) and the rise of global manufacturing.

My own fascination with hot sauces began a few years ago. I was never into spicy foods growing up but after living in the UK for nearly a decade and having so much great Indian food around me all of the time I developed more of a taste for it.

I moved back to the US and after a stint in Palo Alto moved to LA where I started to notice Cholula sauce at some of the best Mexican restaurants I visited. I absolutely love the stuff.

So I started noticing hot sauces more and the more I looked the more I noticed this funny rooster bottle with a strange sounding name I couldn’t pronounce and that familiar green cap. Sriracha.

Where was it from? What did it mean? What nationality was it? It seemed to be in every kind of ethnic restaurant.

The company name sounded Chinese – Huy Fong Foods. Was this the latest Chinese product to take off in the US?

Turns out it is a family-owned business started by a refugee from Vietnam and named after a small village in Thailand Si Racha. So grateful was David Tran for the people who provided safe passage from Vietnam for him that he named his company after the Taiwanese ship that carried him away.

Tran moved to Los Angeles and started his business in Chinatown with a need he personally had. He noticed that Americans didn’t have good hot sauce. So he made hand-made batches in a bucket and drove it to customers in his van.

But his goal wasn’t to make a billion dollars. He wasn’t driven by quick riches. He was driven by wanting to provide a great product. How much could the new generation of entrepreneurs learn from that?

I know it’s what I look for when I want to back companies.

“My American dream was never to become a billionaire,” Tran said. “We started this because we like fresh, spicy chili sauce.”

And build a great business he did. While still owning the business he now does $60 million in annual sales built from nothing.

Could he have grown faster with outside money? Or by selling to a big company and taking in International? Sure.

But it wasn’t his ambition.

You’ll absolutely love this quote

“This company, she is like a loved one to me, like family. Why would I share my loved one with someone else?”

How many of you could say that?

He didn’t want to compromise on product as he knew he would be forced to if he had to expand too quickly. He wanted to keep his prices low (apparently he has never raised his wholesale price in 30 years).

What I learned from the article? What touched me? What lessons could you learn from a Vietnam refugee who makes chili sauce? Quite a bit it turns out …

1. Extreme product passion. When his packaging suppliers tried to get him to change his product to make it less hot or more sweet for American customers he refused, ““Hot sauce must be hot. If you don’t like it hot, use less,” he said. “We don’t make mayonnaise here.”

2. Uncompromising product quality (he processes his chillies the same day they are harvested)

3. He had a guiding principle for the company

4. Focus on the customer and provide value – ”We just do our own thing and try to keep the price low. If our product is still welcomed by the customer, then we will keep growing.” He said this in response to the fact that several other companies are now stealing the Sriracha brand name. He can’t trademark it since it’s the name of a city. By the way, he has never spent a dollar on advertising

5. Provide something distinctive. What will you be known for? Given the brand dilution going on with the name Sriracha how can he still grow his business? The distinctive design of his packaging. That crazy rooster. All those freaking languages on the bottle – the mystery of it all! And the green caps.

But I have to say, despite it all, and it’s impossible to take away from the success of David Tran, I kept wondering if modern business practices couldn’t solidify this into a global product. Branding matters. Organic word-of-mouth worked until this point but I wonder as this becomes an international product line. I wonder how agressive they are with digital distribution. I wonder if they could trademark a broader name that Sriracha so that they can get some defensibility.

I hope the next generation Tran’s have some thoughts on these topics and more. I would love to see this company continue to succeed.

]]>http://stevendiebold.com/my-favorite-entrepreneur-story-in-a-long-time/feed/0Notes on the acquisition processhttp://stevendiebold.com/notes-on-the-acquisition-process/
http://stevendiebold.com/notes-on-the-acquisition-process/#commentsWed, 19 Sep 2012 15:57:43 +0000http://stevendiebold.com/?p=2026Comparatively little, however, has been written about the important transaction at the other end many startups’ life, acquisitions. Here are some things I’ve learned about the acquisition process over the years.

– There is an old saying that startups are bought not sold. Clearly it is better to be in high demand and have inbound interest. But for product and tech acquisitions especially, it is often about getting the attention of the right people at the acquirer. Sometimes the right person is corp dev, other times product or business unit leads, and other times C-level management.

– Don’t use a banker unless your company is late stage and you are selling based on a multiple of profits or revenues. I’ve seen many acquisitions bungled by bankers who were either too aggressive on terms or upset the relationship between the startup and acquirer.

– Research the potential acquirer before the first meeting. Try to understand management’s priorities, especially as they relate to your company. Talk to people who work in the same sector. Talk to industry analysts, investors, etc. If an acquirer is public, Wall Street analyst reports can be helpful.

– Develop relationships with key people – corp dev, management, product and business unit leads. The earlier the better.

– Don’t try to be cute. Leaking rumors to the press, creating a false sense of competition, etc. is generally a bad idea. Besides being ethically questionable, it can create ill will.

– What you tell employees is particularly tricky. Being open with employees can lead to press leaks and can annoy acquirers. Moreover, some public companies insist that you don’t talk to employees until the deal is closed or almost closed. Employees usually get a sense that something is going on and this can put you in the awkward situation of being forced to lie to them. I don’t know of a good solution to this problem.

– Understand the process and what each milestone along the way means. As with financings, acquisitions take a long time and involve lots of meetings and difficult decisions. Inexperienced entrepreneurs tend to get overly excited about a few good meetings.

– Strike while the iron is hot. Just as with financings, you need to be opportunistic. Waiting 6 months to hit another milestone might improve your fundamentals, but the acquirer’s interest might wane.

– There are two schools of thought on price negotiation: anchor early or wait until you’ve gotten strong interest. Obviously having multiple interested parties makes finding a fair price a lot easier.

– Deal structure: the cap table is an agreement between you and the shareholders that says, in effect: “If we sell the company, this is how we pay out founders, employees, and investors.” Acquirers have gotten increasingly aggressive about rewriting cap tables to 1) hold back key employee payouts for retention purposes, and 2) give a greater share of proceeds to employees/founders. Some even go so far as to try to cut side deals with key employees to entice them to abandon the other employees and investors. In terms of ethics and reputations, it is important to be fair to all parties involved: the acquirer, founders, employees, and investors.

– Research the reputation of the acquirer, especially how they have behave between LOI and closing (good people to talk to: investors, other acquired startups, startup lawfirms). This is when acquirers have all the leverage and can mistreat you. Some acquirers treat LOIs the way VCs treat term sheets, as a contract they’ll honor unless they discover egregious issues like material misrepresentations. Others treat them as an opportunity to get free market intelligence.

– Certain terms beyond price can be deal killers. The most prominent one lately is “IP indemnification.” This is a complicated issue, but in short, as a response to patent trolls going after IP escrows, acquirers have been trying to get clawbacks from investors in case of IP claims. This term is a non-starter to institutional investors (and most individual investors). You need to understand all the potential deal-killer terms and hire an experienced startup law firm to help you.

– Ignore the cynical blog chatter about “acqui-hires” (or, as they used to be called, “talent acquisitions”). Only people who have been through the process understand that sometimes these outcomes are good for everyone involved (including users when the alternative is shutting down).

Finally, acquisitions should be thought of as partnerships that will last long after the deal closes. Besides the commitments you make as part of the deal, your professional reputation will be closely tied to the fate of the acquisition. This is one more reason why you should only raise money if you are prepared for a long-term commitment.

If there’s only one passionate party in a relationship it’s unrequited love.

Here’s how I learned it the hard way.

The Dartmouth Football TeamAfter Rocket Science I took some time off and consulted for the very VC’s who lost lots of money on the company. The VC’s suggested I should spend a day at Onyx Software, an early pioneer in Sales Automation in Seattle.

In my first meeting with the Onyx I was a bit nonplussed when the management team started trickling into their boardroom. Their VP of Sales was about 6’ 3” and seemed to be almost as wide. Next two more of their execs walked in each looking about 6’ 5” and it seemed they had to turn sideways to get through the door. They all looked like they could have gotten jobs as bouncers at a nightclub. I remember thinking, there’s no way their CEO can be any taller – he’s probably 5’ 2”. Wrong. Brent Frei, the Onyx CEO walks in and he looked about 6’ 8’ and something told me he could tear telephone books in half.
I jokingly said, “If the software business doesn’t work out you guys got a pretty good football team here.” Without missing a beat Brent said, “Nah, we already did that. We were the Dartmouth football team front defensive three.” Oh.

But that wasn’t the only surprise of the day. While I thought I was consulting, Onyx was actually trying to recruit me as their VP of Marketing. At the end of the day I came away thinking it was smart and aggressive team, thought the world of Brent Frei as a CEO and knew Onyx was going to succeed – despite their Microsoft monoculture. With an unexpected job offer in-hand I spent the plane flight home concluding that our family had already planted roots too deep to move to Seattle.

But in that one day I had learned a lot about sales automation that would shape my thinking when we founded Epiphany.

I Know A Great CustomerA year later my co-founders and I had formed Epiphany. As other startups were quickly automating all the department of large corporations (SAP-manufacturing, Oracle-finance, Siebel and Onyx-Sales) our first thought was that our company was going to automate enterprise-marketing departments. And along with that first customer hypothesis I had the brilliant hypothesis that my channel partner should be Onyx. I thought, “If they already selling to the sales department Epiphany’s products could easily be cross-sold to the marketing department.”

So I called on my friends at Onyx and got on a plane to Seattle. They were growing quickly and doing all they could to keep up with their own sales but they were kind enough to hear me out. I outlined how our two products could be technically integrated together, how they could make much more money selling both and why it was a great deal for both companies. They had lots of objections but I turned on the sales charm and by the end of the meeting had “convinced them” to let us integrate both our systems to see what the result was. I made the deal painless by telling them that we would do the work for free because when they saw the result they’d love it and agree to resell our product. I left with enough code so our engineers could get started immediately.

Bad idea. But I didn’t realize that at the time.

It’s Only a Month of WorkBack at Epiphany I convinced my co-founders that integrating the two systems was worth the effort and they dove in. Onyx gave us an engineering contact and he helped our team make sense of their system. One of the Onyx product managers got engaged and became an enthusiastic earlyvanglist. The integration effort probably used up a calendar month of our engineering time and an few hours of theirs. But when it was done the integrated system was awesome. No one anything like this. We shipped a complete server up to Onyx (this is long before the cloud) and they assured us they would start evaluating it.

A week goes by and there’s radio silence – nothing is heard from them. Another week, still no news. In fact, no one is returning our calls at all. Finally I decide to get on a plane and see what has happened to our “deal.”

Instead of being welcomed by the whole Onyx exec staff, this time a clearly uncomfortable product manager met me. “Well how do like our integrated system?” I asked. “And by the way where is it? Do you have it your demo room showing it to potential customers?” I had a bad feeling when he wouldn’t make eye contact. Without saying a word he walked me over to a closet in the hallway. He opened the door and pointed to our server sitting forlornly in the corner, unplugged. I was speechless. “I’m really sorry” he barely whispered. “I tried to convince everyone.” Now a decade and a half later the sight of server literally sitting next to the brooms, mops and buckets is still seared into my brain.

I had poured everything into making this work and my dreams had been relegated to the janitors closet. My heart was broken. I managed to sputter out, “Why aren’t you working on integrating our systems?

Just then their VP of Sales came by and gently pulled me into a conference room letting a pretty stressed product manager exhale. “Steve, you did a great sales job on us. We really were true believers when you were in our conference room. But when you left we concluded over the last month that this is your business not ours. We’re just running as hard and fast as we can to make ours succeed.”

Unrequited LoveIrealized that mistake wasn’t my vision. Nor was it my passion for the idea. Or convincing Onyx that it was a great idea. And besides not being able to tell me straight out, Onyx did nothing wrong. My mistake was pretty simple – when I left their board room a month earlier I was the only one who had an active commitment and obligation to make the deal successful. It may seem like a simple tactical mistake, but it in fact it was fatal. They put none of their resources in the project – no real engineering commitment, no dollars, no orders, no joint customer calls.

It had been a one-way relationship the day I had left their building.

It would be 15 years before I would make this mistake again.

Lessons Learned

When you don’t charge for something people don’t value it

When your “partners” aren’t putting up proportional value it’s not a relationship

Cheerleading earlyvangelists are critical but ultimately you need to be in constant communication with people with authority (to sign checks, to do a deal, to commit resources, etc.)

Your reality distortion field may hinder your ability to realize that you’re the only one marching in the parade

If there’s only one passionate party in a deal it’s unrequited love

]]>http://stevendiebold.com/why-partnerships-go-bad/feed/1Should Startups Focus on Profitability or Not?http://stevendiebold.com/should-startups-focus-on-profitability-or-not/
http://stevendiebold.com/should-startups-focus-on-profitability-or-not/#commentsSun, 01 Jul 2012 17:56:43 +0000http://stevendiebold.com/?p=1998There are certain topics that even some of the best journalists can’t fully grok. One of them is profitability.

I find it amusing when a journalist writes an article about a prominent startup (either privately held or preparing for an IPO) and decries that, “They’re not even profitable!”

I mention journalists here because they perpetuate the myth that focusing on profits is ALWAYS the right answer and then I hear many entrepreneurs (and certainly many “normals”) repeating the same mantra.

There is a healthy tension between profits & growth. To grow faster businesses need resources in today’s financial period to fund growth that may not come for 6 months to a year. The most obvious way to explain this is with sales people.

If you hire 6 sales reps in January at $120,000 / year salary then you’ve taken on an extra $60,000 per month in costs yet these sales people might not close new business for 4-6 months. So your Q1 results will be $180,000 less profitable than if you hadn’t hired them.

I know this seems obvious but I promise you that even smart people forget this when talking about profitability.

Hiring more people isn’t always the right answer. You have to understand whether they’re likely to yield revenue growth in the near term OR whether you have access to cheap enough capital to fund your losses until your investments pay off.

Exec Summary:

Most companies (98+%) in the world (even tech startups) should be very profit focused.

Being profitable allows you degrees of freedom you don’t have when you rely upon other people’s money.

You may have leverage when you DO need to fund raise. (There are many investors who are not looking to build enormous businesses who value the fact that you can run a business profitably)

It allows you many more exit opportunities. While Google and Facebook will buy “acquihires” (at least as of Dec 2011), many acquirers hate the idea of buying companies that aren’t profitable. When they look at buying your company they often think in terms of “how long will it take until I earn back the profits to pay for my acquisition price?” If you’re not profitable you’re purely a cost center to them.

Being profitable certainly makes your company more sustainable in difficult times.

The characteristics of somebody who should NOT focus on profitability include those who:

Have or perceive that they have the opportunity to build an immensely scalable businesses. Internet scale.

Have easy access to capital by investors who are committed to building businesses at Interent scale

As I like to say,

“If you’re really on to an enormous idea then other people in the market are going to spot that and want to compete with you.

If you have a market lead then raising capital and making investments now will help you as others enter the market.

If you don’t, somebody else WILL!”

The Details

I have had this discussion with many a first-time entrepreneur. They have have raised $2-3 million, built a product that has some amount of market traction and got to annualized revenues of around $1 million.

At this level, as a founder you feel SO CLOSE to profitability that many say, “I’m going to keep my costs really low this year to try and hit profitability. I don’t want to be beholden to investors.”

My response is often, “That’s fine. What’s your objective? Are you looking to potentially sell the company in the next year or two? Do you plan to run this as a smaller business but maintain healthy profits? Do you imagine eventually raising VC and trying to build a faster growing company?”

Because of the circles I run in I tend to meet many people who eventually do want to build large companies and therefore do want to eventually raise VC and “go big.” But they want to do it with leverage.

I often point out that investors at this stage care way more about growth than profits so be careful not to shoot yourself in the foot. I certainly understand the desire to be in control, which is what you are when you earn a profit. Just be careful that it doesn’t come at the expense of investments in growth.

The likely response of a VC to your company that raised $3 million and now is profitably doing $1.5 million in revenue three years later is, “So effing what?” Harsh, but reality.

If you had huge customer growth but just didn’t focus on revenue that’s a different story. If you spent the 3 years perfecting some hugely differentiated technology IP that may also be different. But if you simply went more slowly to show you could earn a profit you may need to look for alternative funding sources to fuel your future growth.

Understanding Profits

No discussion about profitability can sensibly happen without covering the basics first so please forgive the 101 nature of these charts.

When I look at an income statement (also called a profit & loss statement) I start by focusing on the revenue line. One thing that should matter to all people trying to understand the performance of a company is whether they have revenue growth.

I always remind this to journalists who ask me about public stocks. If you had two companies each with $100 million in “earnings” (profits) they might have vastly different prospects for the future. One company might be growing its revenue at 50% per year and the other might be growing at 5% per year.

And assuming they both had the same net profit margins (profit / revenue) then the former company would be much better off at the end of the year.

So while the simplest way that people often evaluate stocks is by P/E ratios (price-to-earnings), one also needs to look at other metrics such as the PEG (price-to-earnings-growth). [of course there are MUCH more sophisticated financial tools than either of these, but PEG is a short-hand many people use]

Investors value growth.

The value of a company is the expected value of all future cashflows discounted back to today’s dollar (because as you know a dollar next year is worth less than a dollar today) and a company that is growing more quickly is more likely to yield better overall profits in the future.

So for a start when you want to evaluate companies you want to evaluate “growth.” Looking at earnings alone across two companies won’t tell you the picture of the different prospects.

And when you’re looking at even earlier-stage companies (as VCs do) you might be even more focused on customer growth than revenue growth.

The Nature of your Revenue Matters

When I do evaluate companies that already have revenue, I actually want to understand the revenue line in more detail. What makes up revenue? Is it one product line or multiple? Do 20% of the customers make 80% of the revenue or do the top 3 customers represent 80% of the revenue.

This is called “revenue concentration” and the more concentrated your revenue the higher the risk that your revenue could decline in the future.

I also try to understand things like how you’re pricing your product, how your competitors price and what your pricing expectations will be in the future. Fast early growth in a market is often eroded when competition gets fierce and prices are forced down due to competition.

Revenue is Not Revenue is Not Revenue
But it’s not as simple as just looking at revenue in dollar terms. For example, look at the following graph. You’ll notice that although both companies have the same revenue every year, Company 1 has MUCH higher gross margins than Company 2 because the cost of sales (COGS) is much lower.

“COGS” represents the amount that each sale costs you. For example, if you sell your product through a third-party reseller who charges 30% of any sale then your COGS will be 30% of revenue (assuming no other costs of sales).

The example chart is not actually atypical. The first company represents a normal software company that sells its products directly (either via sales staff or directly off of the internet). Many software companies have 85-90% gross margins, which is why it has historically been a very attractive industry.

Company 2 might represent an “ad mediation company” where the company gets paid by ad networks for running ads on publisher websites and the company in turn must pay the publisher 85% of the revenue it collects. This is not atypical for “middle men” who often take 15-30% of the value of the sale

This could also be a travel website who gets paid a bounty for selling airline travel.

Companies like to have high numbers in their revenue column but this can be quite misleading. After all, if you sell $500 million of United Airline tickets that isn’t really YOUR revenue. Your revenue is the $75 million you got paid in booking fees.

It could be an eCommerce website or “flash sale” where they are booking revenue from customers but then having to pay out a high percentage of the sale to the clothing manufacturer. Many eCommerce companies are in fact, middle men. Gross margins can range from 15-40%.

I know you’re shaking your head and thinking, “duh” but I promise you that even some of the most sophisticated people I know get off track on this issue of “gross revenue” versus “net revenue.” I saw this first hand with the growth of the “flash sale” category.

“Company X is doing $100 million in gross revenue but is only at 12% margins which means the majority of the value is in the goods.

Many of these companies weren’t even taking physical possession of the goods in the early days. So they are really doing $12 million in “revenue.”

That in and of itself is an achievement. But it’s very different than $100 million in two years.”

Shouldn’t All Companies Want to Be Profitable?

Not necessarily.

Let’s consider the following two software companies, both of which have 66% gross margins.

Both companies look the exact same after one year. They both raised angel / seed money of $1.5 million to fund operations in their first year of operations. Both companies lost $1 million in their first year.

Gross margins at 66% is fine (they’re selling through a reseller who takes a 33% margin) but their sales aren’t yet large enough to cover the costs of their IT development team + management + marketing + office costs, etc. In many Internet startups 80% of the operating costs will be people.

So which company is better run?

The answer is that you have no way of knowing. A naive journalist might lament the fact that Company A is “not profitable” or is being a typical Internet startup and not worried about costs. After all, they doubled their operating costs when they weren’t even profitable.

What did they actually do? They raised $5 million in venture capital to fund growth. They used the money to hire a bigger tech team so they could roll out their second product line. They hired a marketing team to promote their products more broadly.

They hired a biz dev team to work on deals where their product could be embedded in other people’s products as a way to increase customer demand. They got a bigger office space so their employees would feel comfortable and they could improve employee retention.

If there was strong market demand for their product then this investment might pay off handsomely.

Let’s look at years 3-5 of the two companies.

Even though Company B initially looked prudent, it turns out that the investment that Company A made in people led to a higher annual growth rate. At the end of year 5 Company A has earned $14 million in cumulative profits (gains – investment years) while Company B has made $5 million.

Company A is now doing $47 million in annual revenue which Company B is doing $12 so years 6-10 appear rosier for Company A as well.

I know which company I’d rather have invested in. Growth matters.

But let’s consider an even more aggressive scenario. Let’s call it the “super high growth” Internet company. You know, the kind that unknowing commentators would be quick to lambast as being wasteful because they’re not profitable.

The company would have had to raise at least $35 million in venture capital to have funded operations like this. More likely they raised $50 million or more. Note that they likely raised this in 2-3 tranches, not all up front or all at once.

Crazy? Stupid? Should they have slowed down operating costs in order to “make a profit.”

Again, it depends. If the growth is as spectacular as it is here and IF they have access to cheap capital then they’d be crazy not to have raised the VC and instead stayed unprofitable.

This is the trade-off between profits & growth. You can drive profits up by not investing today’s dollars in tomorrow’s growth.

The next time a journalist wants to slam Amazon for not being more profitable I wish they’d understand this. Amazon is continuing to grow at such a rapid pace that of course it should take some of today’s profits and reinvest them in growth.

If there is a company that can’t grow fast enough then they should do other things with their profits, like return it to shareholders.

A Final Note on Profitability vs. Being Cashflow Positive

More 101, but experience tells me this is worthwhile to many. Many investors care much more about cashflows than income statements.

It’s worth noting just for those that aren’t familiar with the difference between an Income Statement and a Cashflow statement that being “profitable” is not the same as being “cashflow positive.”

You can be profitable while losing money.

Huh? I thought profitable meant you were making money?

Income statements are designed according to accounting standards that are designed to “match revenues & costs in the period for which they should be attributed.”

Quick examples:

1. An ad network (the middleman) might sell $500,000 in ads. It might agree to pay the publisher who runs those ads in 14 days. The advertiser who bought the ads might pay the ad network in 60 days.

So for this money I might show that I’m profitable on my income statement but I might actually have paid out $500,000 that I didn’t receive yet (negative cashflow)

2. I might have sold a $1.2 million contract over two years. I therefore might be “booking” $50,000 per month in revenue on my income statement. But the customer may be paying me quarterly in arrears (at the end of the quarter). So for the first two months of every quarter I’m showing revenue on my income statement that I don’t yet have in cashflow.

3. The same is true obviously on the cost side. I might have bought $450,000 in equipment that I amortize over the three years that I expect this equipment to be useful. So every year I show costs of $150,000 but I really spent the money up front.

]]>http://stevendiebold.com/should-startups-focus-on-profitability-or-not/feed/0The Simplicity Thesishttp://stevendiebold.com/the-simplicity-thesis/
http://stevendiebold.com/the-simplicity-thesis/#commentsMon, 07 May 2012 22:00:08 +0000http://stevendiebold.com/?p=1975This blog is written by a member of our expert blogging community and expresses that expert’s views alone.

The only companies or products that will succeed now are the ones offering the lowest possible level of complexity for the maximum amount of value.

A fascinating trend is consuming Silicon Valley and beginning to eat away at rest of the world:theradical simplification of everything.

Want to spot the next great technology or business opportunity? Just look for any market that lacks a minimally complex solution to a sufficiently large problem.

Take book publishing, for instance. Or website hosting. Jeff Bezos put these and other industries on notice in his annual shareholder letter, which included a self-service rallying cry against gatekeepers that perpetuate complexity and block innovation. After all, what could be simpler than provisioning servers in seconds with just a credit card and an API? But this call extends beyond Amazon’s empire to all ecosystems and products.

Any market where unnecessary middlemen stand between customers and their successful use of a solution is about to be disrupted. Any service putting the burden on end users to string together multiple applications to produce the final working solution should consider its days numbered. Any product with an interface that slows people down is ripe for extinction. And any category where a disproportionate number of customers are subsidizing their vendor’s inefficiency is on the verge of revolution.

Ultimately, any market that doesn’t have a leader in simplicity soon will. And if your company doesn’t play that role, another will lead the charge.

If you’re not the simplest solution, you’re the target of one.

In the ’90s and into the 2000s, an early wave of Internet services focused on simplicity through disintermediation: Amazon for shopping, eBay for selling, Google for searching. But these nascent players were limited in their approach. Sure, self-serve Internet services inevitably required some level of simplicity, but everything was just so damn new thatexperience didn’t meaningfully help companies differentiate. At least at first. But then companies like Yahoo and Microsoft grew into monstrosities, producing bloated technology empires.

IF YOU’RE MAKING THE CUSTOMER DO ANY EXTRA AMOUNT OF WORK, NO MATTER WHAT INDUSTRY YOU CALL HOME, YOU’RE NOW A TARGET FOR DISRUPTION.

Today, things are different. Putting up a website is no longer novel. A clunky consumer device simply won’t be adopted when alternatives from Apple exist. And as more and more of the hard work of building infrastructure, managing computing, and installing and monetizing applications is abstracted from what necessarily goes into launching a company today, differentiation is going to come from solutions that create the best (read: simplest) experience.

This should be a red flag for any product or solution, whether digital or analog, that isn’t minimally complex. If you’re making the customer do any extra amount of work, no matter what industry you call home, you’re now a target for disruption. Because of the Internet’s scale and the speed of change in the world, the Innovator’s Dilemma has mutated over the years into a pernicious, methodically destructive force, leaving any company that is even the slightest bit more cumbersome, costly, or inefficient to be beat out by a newer, more streamlined competitor.

At Box, our enterprise customers are experiencing this revolution firsthand. Across organizations of every size, CIOs–generally not an aesthetics-driven group–are increasingly obsessed with implementing the simplest technology in their organizations. For years, enterprise solutions purchased for their feature checklists were later forgotten about post-deployment, underutilized, or frankly intolerable for end users. With tens of billions of dollars spent every year across infrastructure management, security, business intelligence, or analytics, it’s not surprising that a crop of simpler players are emerging, like OpsCode, Okta, Domo and GoodData, respectively. And they will inherently have a huge advantage over any of their more complex predecessors.

But while enterprise software is in dire need of a revolution, it represents just a fraction of what will be disrupted by radical simplification. Instagram’s billion-dollar acquisition and rise to 40 million users can mostly be attributed to the creation of the cleanest, most elegant, and simplest way to share photos on mobile devices. It could do this by focusing solely on nailing a brilliant experience on a single platform, while leveraging the scale and distribution offered by iPhones. SolveBio, a startup aimed at bio-scientists, is building a trivially simple solution that advances DNA and medical research, enabled by the infinite computing resources of Amazon. Spotify, arguably the fastest-growing music service today, reduced the friction of getting to unlimited music from any device down to nothing. By stepping back and questioning every assumption in music licensing and software, Spotify has built an unparalleled product and experience.

IT’S ALL ABOUT REDUCING CHOICES AND UNNECESSARY STEPS, NARROWING CLUTTER, AND ADDING A TOUCH OF CLASS TO BOOT.

These are all examples of solutions that have hit, for today, the lowest possible level of complexity for the maximum amount of value. And that’s what makes them so disruptive to traditional players. But there are near infinite areas to attack. Particularly as problems get harder and more analog in their nature (coordinating loan applications, applying for colleges, dealing with health care providers, handling payroll) immense opportunities await the startup ecosystem.

So what do you do about it?

Whether you’re the incumbent or a startup, how do you build sufficiently simple solutions to complex problems? By abstracting as much of the work that’s actually going on from what’s required of the consumer, and maniacally slashing any process or barrier that prevents consumers from getting the best possible experience. It’s all about reducing choices and unnecessary steps, narrowing clutter, and adding a touch of class to boot.

Now, this isn’t an excuse for solutions to accomplish less. The irony of simplicity is that it invariably lets you domore. Simplicity isn’t about giving up any value–it’s a movement around designing technology or products thoughtfully to make them substantially more useful and attainable. Some of the simplest solutions on the market are equally the most advanced–Square beats out any other form of retail payment service; Nest offers the most compelling and powerful thermostat ever invented.

Here are just a few ways to get started in achieving minimum complexity:

Think end to end. Simplicity relates to the entire customer experience, from how you handle pricing to customer support.

Say no. Kill features and services that don’t get used, and optimize the ones that do.

Specialize. Focus on your core competency, and outsource the rest–simplicity comes more reliably when you have less on your plate.

Focus on details. Simple is hard because it’s so easy to compromise; hire the best designers you can find, and always reduce clicks, messages, prompts, and alerts.

The next thing to understand is that simplicity is a relative, moving target. The accelerating speed of innovation ensures that you’re never the simplest solution for long. Any delay in staying ahead of the curve can give way to a new disruptor that brings new efficiencies or creates new elegance because of an enabling technology or social change. Original category simplifiers like PayPal and Intuit have fallen prey to more nimble and disruptive competitors that have taken advantage of their current complexity and weaknesses.

Companies that will win in the long term are those that can continue to simplify experience while simultaneously tackling harder and harder problems. Sure, it’s novel and powerful that Square can accept payments for a 10-person retail store, but when they start to do it for Gap, the game is radically changed. Amazon succeeds by continuing to charge into all areas of infrastructure delivery–consistently launching new tools and platforms that would otherwise cost developers an arm and a server closet, all with the same focus on abstraction and simplification.

When technology was inherently and unavoidably complex, it was forgivable that solutions weren’t elegant and simple. It was at one time understandable that finding and visiting a new doctor could take weeks, or searching for enterprise information wasn’t successful. But with a myriad of elegant and simple solutions entering the market, users are learning to expect far more from their products. Simplicity has become a virus that will either destroy you or catapult you to the front of the market.

Considering how easy it has become to start a company – and the legions of young entrepreneurs keen on doing so – I guess it shouldn’t surprise me that I get pitched so many identical ideas.

One perennial source is college entrepreneurs who, drawing from their limited personal experience, tend to pitch me ideas having to do with dating, course selection, tutoring, text book rental, and the other inconveniences of college life.

For obvious reasons I also get pitches from the hundreds of companies all aiming to be the “Netflix Of” something. I’ve seen (in no particular order) companies wanting to become the Netflix of Toys, Batteries, Books, Games, Anime, Sports, Clothes, Flowers, Cosmetics, Baby Clothes, Skis, Cell Phones and Neckware. And that’s just scratching the surface.

Other times there just seems to be a flavor of the month. Recently it’s been Airbnb and Getaround wannabe’s, all trying to bring peer-to-peer sharing to new categories like bikes, tools, sporting goods, and clothing.

The tragegy here is not that the ideas are derivative or not particularly creative, it’s that so many of these ideas have been tried before. And failed!

I call it chasing a mirage.

When you are chasing a mirage, your brilliant idea shimmers with promise when seen from a distance. It’s only after you’ve expended valuable time and money crossing the desert that you ultimately discover that there was never really anything there.

But the real tragedy isn’t the loss of time and money, it’s that the inevitable failure was tragically knowable in advance if only you had taken the time to research those previous efforts and think analytically about why previous efforts to do this very same thing had met with failure in the past.

I still can’t quite figure out why so many people are willing to plunge lemming-like over a cliff that someone else has already jumped off. It’s seems to be an equal mix of ignorance (“I had no idea anyone had ever tried this before”) and hubris (“I’m better than those other jokers”).

Whatever the case, it’s gotten so that whenever I find yet another entrepreneur gearing up to strike out across the desert toward their personal mirage, I ask them, “why you?”

In this case, asking “why you” is not a knock on them personally. It’s not questioning their abilities as an entrepreneur, nor their perseverance. (In fact, overflowing self confidence is an important weapon against the endless chorus of people telling you you’re idea won’t work, or that you can’t pull it off).

No, “why you” means “why are you going to be successful with this idea when others have not”? if you don’t understand exactly why the pioneers who went before you failed, than you risk repeating the exact same experiment with exactly the same results. It’s one thing to have confidence. But it’s hubris to think that you are so much smarter and harder working than the others. The key is what you do, not how hard you do it.

If you think you’ve found a blank space on the map, a little warning bell should go off. Why has no one done this? Why is no one doing this now? If you can figure out what went wrong with other tries, you’re in an infinitely better place to get it right with yours. And if you truly have found an idea that has never been tried before, the proper emotion should probably be fear rather than excitement.

As Santayana famously wrote, “those who do not remember the past are condemned to repeat it”. But I think there’s a simpler way to think about it: If you’ve come up with a seemingly novel idea that seems to good to have not been tried before – well it probably has.

Or, as any poker player will tell you, If you can’t tell who the sucker is at the table, It’s you.

]]>http://stevendiebold.com/are-you-chasing-a-mirage/feed/0Starting Overhttp://stevendiebold.com/starting-over/
http://stevendiebold.com/starting-over/#commentsSat, 28 Jan 2012 22:18:30 +0000http://stevendiebold.com/?p=1910Sometimes, the best way to improve something is to begin again from scratch. Even if it’s your top-selling product.

Jason Fried is the co-founder and president of 37signals.

In 2004, 37signals, the software company I co-founded, released a Web-based project-management and collaboration tool called Basecamp. At the time, we mostly did Web design; Basecamp was a side project that we developed in our spare time to make it easier for us to work together.

Back then, project-management software was mostly about charts, graphs, statistics, and one-way broadcasts. Basecamp was different. It provides team members with a consistent place to work on projects and tools to swap ideas, share feedback, make revisions, and deliver the final project online. Millions of people across nearly every industry have used Basecamp to manage more than eight million projects; 96 percent of users say they would recommend the software to others.

That can mean only one thing: It’s time to start over.

Why mess with something that has proved so successful? There are a couple of reasons. For one, eight years is a long time. Consider the ways in which the world has changed over the past eight years. We’ve learned a lot about collaborating in that time. We’ve received tons of feedback from users, many of whom have shown us the ways in which they work. Plus, there are technologies available that didn’t exist back then.

But that’s only part of it. About a year ago, we began discussing how we might improve our best-selling product. The more we talked, the more it became clear that the only way to significantly improve Basecamp was to start over.

Think about a product’s life span. When something new is released to the public—and this is especially true of software—it’s hardly set in stone. You get feedback from customers and make modifications. You add features, refine existing ones, and make things better over time. If you really listen and do it right, the product earns its success.

But paradoxically, that success makes it harder to change. As time goes by, people get used to things the way they are. And the more someone is accustomed to doing something a certain way, the harder it is to ask him or her to change. When it comes to introducing ideas, the years have a way of boxing you in.

And that’s where we found ourselves with Basecamp—a successful product that was tough to change in major ways. Of course, it has evolved; over the years, we’ve made thousands of incremental improvements to the software. But now we have ideas that are more revolutionary than incremental. We think these ideas will dramatically enhance Basecamp’s speed, power, and flexibility.

The problem is that we cannot make these kinds of changes in the existing product. Over time, software builds up legacy. The old technology is baked in, and the roots of the product are so knotted that simply unwinding them becomes a massive undertaking. Think about trying to uproot a 250-year-old oak tree versus a two-year-old one.

The easy thing to do is nothing. But continuing on the current path is a time-tested formula for complacency.

Of course, customers have a way of building up legacy, too, and there’s bound to be some grumbling. We’ll deal with any such issues as they arise. But one thing is certain: Starting over doesn’t have to mean forcing change on existing customers. We’ll have two versions of Basecamp—the Classic version and the new version. Users will be able to switch to the new Basecamp or stick with the Basecamp they are already comfortable with.

After a year of hard work, this is all set to happen soon. How will our customers receive it? In an upcoming column, I’ll let you know.

Starting up a business is hard work, really hard work. Every day, the founders have to juggle mundane tasks: pitching new clients or investors, making sure there’s toner in the printer, sweet-talking clients, and managing contractors–all while having cash-flow-related panic attacks.

With all these daily commitments constantly eating up your precious time, it leaves little room for the important stuff, the reason you started the business to begin with: to do things your own way, by pursuing your own unique vision and building an organization around it. However, if a company is to grow healthily, it needs a defined identity. That’s easier said than done. The branding process is not complex in itself, but it does bring up difficult and complex discussions about who you are and what you want to achieve and how to express that through language, interactions, and design. First, you need to figure out who you are.

Define Who You Are

Most entrepreneurs have a clear idea in their head what they are aiming to accomplish. However, when asked what their new company does, most entrepreneurs will respond with a confused garble of abstractions, conceptual solutions, and often some tech jargon thrown in for good measure—an explanation that would outlast an elevator ride even in the highest tower of Dubai. That’s no good. Language needs to be refined, or you are dead in the water.

The most straightforward yet challenging way to do so is boil it down to one simple descriptive sentence. Avoid lofty super-pretentious proclamations like “We are changing the world by ushering in a new paradigm in social interfacing,” or some such nonsense. Don’t worry about not sounding “advanced” enough; simplicity is always king. Distilling everything down to one sentence is incredibly hard and takes hours upon hours of word picking and philosophical discussions in the conference room. Of course, that one sentence is not going to tell the whole story, but that’s not the point. The point is to train and discipline yourself to achieve brevity and clarity while communicating your brand. You should arrive at a sentence that summarizes what you do and provokes people to ask how and why.

The key to successful brand communications is a trifecta of brevity, clarity, and consistency. Avoid mission-statement sound bites at all costs; they are useless.

Differentiate

Yes, we’ve heard it a million times, and it seems obvious. Still, so many new companies keep falling into the trap of telling everyone how fantastic they are, what a great team they’ve built, and how awesome and cutting edge their technology is. Whey are trapped in their own ego bubble. Instead, what people want to hear is why your thing is better than the other things.

Avoid the Helicopter Mom Syndrome

Your company is your baby. But there’s no need to smother it by sticking your fingers in every single pot and pie. Building an organization means delegating tasks to other people in your organization. They were hired because of their expertise, so let them go ahead and do their jobs. Micromanagement slows down the process and diminishes the quality of work. Instead, focus on the organization as whole: How do projects get done? Quality control? Processes for hiring? Knowledge sharing? Company culture?

You might ask yourself what all this has to do with branding. In fact, it has everything to do with your brand. Early on, the people in your organization are the only thing your brand has got going except for a promise of future expectations. There is no history, no established product or service at this stage, so make double sure that you come across the way you want in every thinkable touch point. And let people do their thing.

Craft a Visual Identity

Once you have sorted out the more existential facets of the brand identity, you can start sorting out a visual identity: logo, website, fonts, colors, business cards, and letterhead. The great thing about design is that if applied correctly it can make your business instantly emit the values you want to communicate–trust, gravitas, innovation, quirkiness, luxury, whatever your brand identity dictates. However, do not attempt to design your own brand. It almost never works. Hire a professional who actually knows what he’s doing. It will pay off.

Existential Anxiety Is Normal

Building a start-up usually entails spending an unhealthy amount of time locked up with your partners strategizing, brainstorming, and planning ad infinitum. This is a necessary phase to make sure that you have kicked the tires from every angle and really polished the concept. However, a peculiar side effect of all this intense work is that sometimes you lose all judgement of what exactly you are trying to achieve. Is it good or bad? Does it even make sense? Am I the only person in this world that can see any value in what I’m doing? Am I crazy? Without any existing customers, you don’t have a real feedback loop to confirm if what you are doing is even valid.

Don’t be alarmed, this existential brand-identity anxiety is normal. You need a break. Talk to someone from the outside world who can confirm that you are still sane. Try out your descriptive sentence on some random people, show them your logo, and see how they react. It will bring back a sense of perspective.

Building a new brand is not easy, but it needs to be done. So, lastly, get at it!